WASHINGTON – Federal Reserve Chair Janet Yellen said Tuesday that the economic recovery is not yet complete and for that reason the Fed intends to keep providing significant support to boost growth and improve labor market conditions.
In delivering the Fed’s semi-annual economic report to Congress, Yellen said the Fed’s future actions will depend on how well the economy performs. She says if labor market conditions continue to improve more quickly than anticipated, the Fed could raise its key short-term interest rate sooner than currently projected. But she said weaker conditions will mean a longer period of low rates.
Many economists believe the federal funds rate, which has been at a record low near zero since December 2008, will not be increased until next summer. Yellen said current monthly bond purchases likely will end in October.
Those bond purchases have been trimmed five times, taking them from $85 billion per month down to $35 billion per month currently. Yellen said if the economy keeps improving, the Fed will keep reducing the bond purchases at upcoming meetings with the final move being a $15 billion reduction at the October meeting.
In her testimony before the Senate Banking Committee, Yellen said the economy is improving and the sharp downturn in economic activity in the first three months of the year was likely the result of temporary factors.
“Although the economy continues to improve, the recovery is not yet complete,” she said. Even with a drop in the unemployment rate to the lowest level since September 2008, Yellen said there were numerous signs of significant slack in the labor market, including continued weak growth in wages.
She also played down a recent acceleration in inflation, noting that inflation still remained below the Fed’s 2 percent target. Prices were up 1.8 percent for the 12 months through May.
Because labor market conditions have not yet fully recovered from the deep 2007-2009 recession and because inflation remains below target, Yellen said the Fed expected to continue with its current policies of keeping interest rates exceptionally low to boost economic activity.
In answering questions, Yellen said that while the drop in the unemployment rate was encouraging, it was too soon for the Fed to begin raising interest rates, given past periods in this recovery where hopeful signs of an acceleration in economic activity fizzled out.
With its key short-term interest rate already as low as it can go, Yellen said the Fed had no margin for error.
“The Federal Reserve does need to be quite cautious with respect to monetary policy. We have in the past seen sort of false dawns, periods in which we thought our growth would speed, pick up and the labor market would improve more quickly and later events have proven those hopes to be unfortunately over-optimistic,” she told the committee. “We need to be careful to make sure that the economy is on a solid trajectory before we consider raising rates.”